Sometimes it is useful to reflect back more than a nanosecond to check one’s anchoring bias. With US equities back at 2007 levels, we thought it may be instructive to look at what the Fed was thinking – and what the FOMC was looking at – to be better able to judge their ‘forecasts’ now. To wit Q4 2007, FOMC… “Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance.” The reflexivity of the use of market-based measures to preempt their actions is very clear from the presentation materials, as, just like now, there was falling current year EPS expectations but a phoenix-like resurrection due in 2008 based on analyst’s expectations. Furthermore, the expectations for rate changes from Q4 2007 to Q4 2008 was remarkably modest (even as they had all the data on subprime delinquencies soaring and monolines collapsing) – and of course, turned out to be absolutely and utterly incorrect. And yet, we listen intently to every forecast word they utter?
From Oct 2007 FOMC:
“Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.”
From Mr. Dudley’s Presentation Materials at the December FOMC:
Earnings are down but have no fear – they will rise again next year..
And the market is not expecting rate cuts so things can’t be that bad – or the efficient market would have priced it in?
And then finally, the 3 versions of the December 2007 FOMC statement – where the Fed seems to congratulate itself on noticing the weakness, and the proclaims that its actions will save the day (even though there are some ‘downside risks’.
Remind us again, why we pay any attention to the forecasts of this motley crew?